Episode Transcript
The Finance Ghost: Welcome to episode 258 of Magic Markets. We’re recording this on a day where the gold price has gone through a big milestone, where the rand has now broken another milestone against the dollar.
So, some important levels are falling – mainly psychological levels more than anything else, really. There’s a lot going on out there.
This has led us to talk a little bit about emerging markets this week. And specifically, inside this emerging market, some of the recent updates from a couple of retail and FMCG-type businesses – one defensive, one cyclical.
Moe, welcome to the show. I’m looking forward to obviously getting your macro view on emerging versus developed and to chat through some of these names, as well.
Mohammed Nalla: Ghost, we’re so blessed, because we look at markets across the board, we look at markets globally, and there’s always so much going on. We’ve covered a couple of macro shows, and we haven’t even touched on emerging markets as a theme that we wanted to unpack.
It’s why I think it’s so relevant. Because, as you say, gold has gone through a milestone; the rand has gone through a milestone to the downside – stronger, so that’s obviously good news.
But what’s so ironic for me is that the market always seems to get its timing on emerging markets wrong.
I recall having a conversation at a conference around a year and a half ago, talking about emerging markets to some people, some big pension funds up here in Canada, and really no appetite at that point in time.
One of the participants actually said to me, "Why should I look at emerging markets? They just keep underperforming the S&P."
And lo and behold, if you fast forward – yes, it was a bumpy ride. We had a period, probably following that meeting, where that individual was 100% correct. The S&P continued to shoot the lights out.
But that seems to have actually taken a bit of a pause. And over the last few months, we’ve actually seen emerging markets – as a complex; as a whole – outperforming the S&P 500.
And again, long-term listeners to the show will know that for most of last year, my positioning was very much ex-US. I said to look at European markets – not quite emerging markets, but look at Europe; look at China.
I must say, I wasn’t outright bullish on emerging markets as a whole (and we can unpack some of that), but boy, has that actually come through as a strong theme.
And if you just go and map the relative performance of $EEM, for example (that’s an ETF that operates in that space for emerging markets), versus the S&P, you can actually see how that trade has come through very strongly, over the course of the last few months.
But what are some of the key metrics required for an emerging markets rally?
First and foremost would be a softer US dollar (we can touch on that), because the rand has done really well. How much of that is the rand? How much of that is actually the US dollar?
Then, you actually need easy interest rates in the rest of the world. We’ve had easier interest rates; we’ve had falling global rates. What actually happens with that, right now? Have we actually seen the best of it, or is there still more to come?
And then you need somewhat of what I would call a ‘commodity impulse’. It used to be the ‘China impulse’, because China was driving the commodities boom. Right now, it’s a little bit more nuanced than that.
The bull markets in commodities have been safe havens – PGMs, gold, for example – and also, more recently (that electrification and reindustrialisation, I guess), copper is coming through quite strongly.
Our last show, just last week, was on copper. If you get those key mega-themes coming through, that gives you some of what it takes for an emerging markets rally, but let’s unpack how sustainable that is. What are some of the other drivers?
The Finance Ghost: Moe, there’s certainly a lot to talk about. As you say, it’s the dollar, it’s all these conditions, for emerging markets to do well.
I’ll just give you one metric or data point here that’s very relevant (to a South African audience, certainly): MTN, up 7% year-to-date.
Why are they up 7% year-to-date? Is it suddenly because South Africans are making more phone calls and using more data? No. It’s because they have a big African business and, historically, the African subsidiaries (their currencies) have really, really struggled when the dollar is strong.
So, a nice weakening dollar is only good news for these frontier markets in Africa (never mind even emerging markets; frontier markets are obviously very affected by this). A lot of the expenses in those businesses are actually denominated in dollars because, in Africa, there are so many contracts that are denominated in dollars.
So, it’s actually very interesting, and it drives stuff like: if you want to take a view on the rand-dollar, you can go and buy MTN. How interesting is that?
And, talking about some of the positioning around macro stuff, we obviously cover primarily American stocks on Magic Markets Premium (though not exclusively). Last week, we did Games Workshop, for example, which is an English company.
The reason we do that is: just because the dollar is behaving like this right now, it doesn’t mean that you shouldn’t still be looking at the underlying stocks in the US, for example. What you’d do now is you’d consider them on their merits, then consider your currency exposure as part of your broader portfolio.
Because yes, right now, it might look like the rand is doing very well, etcetera. But I’m not 100% sure that this is filtering down into what’s going on in the South African economy at the grassroots level.
Because there have been some releases recently, on the JSE, of consumer-facing stocks, and I’ve got to tell you, Moe, they haven’t been particularly good.
Last year on the JSE, the clothing retailers, for example, had a shocking year. If you wanted to make money last year on the JSE, there were ways to do it, of which gold was the most obvious – the commodities have been flying.
I’ll refer listeners to last week’s show with Mesh.Trade, where you can go and learn about how to invest in copper, for example, and what some of the investment case-type stuff is there.
But yeah, it’s just that you’ve mentioned some of the factors there, and I think MTN is just such a good example of how there are these unusual ways to play this game that aren’t necessarily clear to you unless you follow the markets quite closely, right?
Mohammed Nalla: Indeed. And we always start off with the currency because South Africans, I think, are hypersensitive to the currency. We’ve seen the rand is sometimes a pressure point, and then it reverses quite sharply.
We’ve touched on some of my thinking on the rand in previous shows, but just at a snapshot level, there are a number of ways you can try and attribute a fair value to the rand.
I’ve always said that it’s an academic construct, but it’s a nice anchor to see how much risk is actually priced in. And, over the course of the last year, if you look at the rand's performance – really stellar.
If you try to do a performance attribution against that, around 60% of that move was related to the fact that the US dollar was weaker (and you saw that, because the dollar weakened against most of your majors that are out there – it weakened against the Euro and so forth).
But then the other 40% was also a compression in that idiosyncratic risk premium that you get coming through on the rand. My assessment, at present, is that we’re arguably at fair value, if not slightly compressed, on some measures.
And that’s always a good time for South African investors who are maybe less exposed to international markets to start considering some of that currency diversification.
Now, again – not a crystal ball. So, not to say the rand can’t go a lot stronger and the dollar can’t go a lot weaker. But if you just look at last week's performance as an example, we saw the rand strengthen against the US dollar, but it was actually flat against the euro and the pound.
That’s telling you that, if you’re looking at the rand and you want to try to ascertain whether the rand is doing quite well, look at it across the other major currencies as well, not just against the US dollar.
Now, I want to pivot from that, because you’ve touched on a couple of interesting points. You’ve mentioned MTN, for example, and how you can express this view through various stocks.
This ties into another point I wanted to raise, which is the valuation point. Because what we’ve had, over the course of the last while, was that emerging markets were not really in favour.
I think the market got a bit of an overhang from China. Remember, around two to three years ago, China got sold off quite hard. And so, maybe some people there are saying, “Even if we are buying a good, strong emerging market like China, we got hurt in that market.”
What’s happened is that if you look at valuations – equity valuations; strip out the currency now, just look at equity valuations – those emerging market stocks (whether it’s in China or in Latin America or even in South Africa, and you’ll know a lot about this) don’t trade at the kind of ‘heady’ valuations that we’re seeing in the US – and in other developed markets, but in the US specifically.
This gives you that valuation argument that helps bolster a case for emerging markets, if you’re looking at it over the long term.
Other long-term trends might just take too long to play out. A commonly cited one here would be the fact that emerging markets have more favourable demographics than developed markets. They’ve got a growing market.
And so, for as long as underlying disposable income is resilient and comes through, you superimpose that on top of population growth and emerging markets, in theory, should be very compelling over the long term.
But again, that doesn’t play out as cleanly. That’s one of the reasons we haven’t seen this move en masse into emerging markets. There’s a saying in the market that “rotations start in price, but they spread via flows”. I think we’re starting to see some of that price action come through.
We saw emerging markets doing quite well over the last few months, but the flows are still slow to materialise, and we haven’t quite seen that second-order effect come through.
It’s why I don’t think it’s just a slam-dunk, "Hey, you’ve got to go into emerging markets." You do still have to be picky.
The last point I want to land on here (then we can maybe move on to a couple of other things) is the fact that emerging markets are viewed as an asset class. You’re buying the emerging markets index.
And that’s probably the wrong way to go about doing it because, within emerging markets, they’re actually very heterogeneous. You might like China, you might like Latin America, but you might not like some of the other Asian economies and so forth. So, you’ve got to be a lot more selective around that.
And it’s not as simple as just saying, "Hey, yes, emerging markets." You’ve also got to be a little bit picky around which emerging markets you look at.
Ghost, I’m going to pause there because the last point I want to touch on – and I want to hear what you’ve got to say – is just how this has played out historically. Which eras did we see an emerging markets rally? Where did they do quite badly?
See what conditions were present at those various cycles of the market and try to map that against what the macro backdrop is today.
I want to hear what your thoughts are on this, as well as some of your insights on the South African market specifically.
The Finance Ghost: Yeah, I mean, as you say, there’s a lot of nuance, right? And valuation is obviously always going to be one of them.
So, India is a very good example. For the last however many years, we’ve been hearing about the Indian growth story, and it’s been very real in terms of the underlying economy.
It’s a services economy – they do a lot of outsourcing from US companies, etcetera. I’ve got to tell you, if the dollar keeps doing this, it will be interesting to see what happens to that.
But a lot of this was priced in. The Indian market got to the point where it was trading at pretty expensive multiples relative to its averages. And that’s always worth looking at: historical averages of a particular market versus where it’s trading now.
And if it is very different to the historical average, then you need to ask yourself, “Why is that justified?” And that applies whether the multiple is much higher (in which case obviously there needs to be a much better situation there than on average before), or if it’s much lower (in which case you need to say to yourself, "Well, is it really so much worse and, most importantly, will it stay there?").
And that’s why people – for the whole of last year, basically, though not necessarily towards the end – have been saying, "The South African market is cheap,” and, “You can pick up these things at a low multiple,” etcetera. All of this is true, but if you had bought the Top 40, you’d be thinking, "Wow, I really nailed it.”
But again, your returns would have been thanks, primarily, to gold, commodities and one or two other bigger names (like telecoms had a good year, etcetera). If you’d gone and bought a basket of South African-focused stocks, you could well have ended up with actually a pretty tough outcome.
Obviously, that’s where stock picking becomes very important, and there were some names that did well, as well. But there, the sort of ‘macro emerging market South Africa’ story didn’t necessarily filter down into a successful outcome for you, at the single-stock level.
And that’s obviously what makes this so difficult, but also so exciting: it’s about tomorrow's winners, not what did well over the past year.
Mohammed Nalla: Yeah, absolutely. That India point is so valid. I remember, it was the start of 2025 and everyone was so bulled-up on India.
I was cautious. I was telling my clients out there in the institutional space, "I don’t like India, I think the valuations are overcooked." And that goes back to the point I just made, where initially, you see the reaction in price, then you see the reaction in flows.
And I think India was the beneficiary, first of that price move, and then the flows – everyone I was speaking to who was even vaguely interested in emerging markets had the India trade on.
And that, for me, is a sign of crowding in the market, and that’s why it’s so important to look at these cycles because they kind of ‘start off’.
I would say we are kind of between phase one and phase two, where you’ve had the price impact, maybe the flows are going to start to come through, but once that matures, you’ve got to be very careful, because that’s when the valuation point comes through.
And I think your point on South Africa comes through quite strongly there, because, as you said, it’s largely been a commodity story rather than an emerging market story. That’s so important because… Let’s map that against various eras where we had these massive rips in emerging markets.
If you think back to the early 2000s, that was when you had a very strong emerging market – it was a commodity supercycle as well.
The conditions behind that were a weaker US dollar (tick); the China acceleration (tick); a commodity supercycle (tick); abundant liquidity (tick), all coming out of that dotcom boom-bust story. And so, EM became the default global trade.
That’s one example. If you look at the late 2000s, you had this EM rebound, but then it gets quite messy. It rebounded, then you had maybe liquidity pulling back, you had markets getting a little bit concerned around valuations, and that’s the second phase that I’m talking about.
And so, where are we sitting right now? Because at the moment, as I say, you’ve got the US dollar that’s a bit weaker, you’ve got commodities coming through strongly.
I think you’ve got some abundant liquidity in global markets; easier interest rates. In fact, we’ve got a Fed meeting this week, and the market’s saying, “Maybe they hold at this meeting, maybe there’s a cut at the June meeting.”
So, I don’t think it’s a slam dunk on the abundant liquidity and the global growth trade. That’s why I’m saying, “Yes, you have to be cautious.”
Am I going to put my name there and say, “Yes, it’s an emerging markets trade”? I think there’s a reasonable basis for emerging markets to do well. I think there’s a reasonable basis for us to believe that we may be in the earlier stages of a commodity supercycle.
It’s not exactly the same playbook as the previous commodity supercycles we’ve had, but I think there’s enough there for me to be interested, and to potentially overweight emerging markets versus some of the developed markets that are out there.
I’m not going to bet the farm on this, but, as a relative positioning indicator, I think there’s a reasonable basis there, Ghost. What do you think?
The Finance Ghost: Yeah, there’s a reasonable basis there. Obviously, what I’m very focused on at the moment is what’s happening here at home for me, at least, which is the South African economy and, again, to what extent some of these wins will actually filter down.
As I said at the beginning of the show (and maybe I will touch on them now), we’ve seen some updates from consumer stocks. That gives you an idea of what’s going on out there.
In some cases, you have to be careful because the consumer stock in question might be a bit of a broken business. Truworths Africa, for example, is just not doing well at the moment. They’re not really responding to all the competitive pressures.
When I see weak sales growth from them, I take that with a bit of a pinch of salt, in terms of, “Well, what does that tell us about the underlying economy?”
But when you see something like Clicks having a significant slowdown, then that does tell you something.
I’ll just touch on some of the high-level points, Moe, because you probably wouldn’t have seen this. For the 20 weeks to the 11th of January, Clicks Group turnover was up 7.4%.
Their distribution business actually outperformed their retail business. They supply independent pharmacies as well, so wholesale, nice growth there. They basically benefit from the capex of others in rolling out stores (the ones that they supply), so nice to see that, I guess.
Record Black Friday: South Africans remain absolute bargain hunters. Retailers sometimes manage to actually get through Black Friday with their gross margin intact.
They squeeze their suppliers, or they engineer deals ahead of time (so they make something look like a great deal, where it actually isn’t necessarily – people must always be aware of that). But, record Black Friday tells you South Africans are still looking for bargains here.
Comparable store sales, though – that’s the key metric. That was only up 3.7% (much slower than 5.9% in the comparable period).
Inflation was only 2.4% from 3.5% previously, so the retailers are struggling because inflation is coming down, but it’s not being replaced by volumes.
Normally, what you’d want to see is, “Okay, inflation isn’t so bad. People are hopefully getting increases that are higher than that, so they can spend a bit more money, and volumes go up.” But that doesn’t really seem to be happening.
Some of the drop in volumes seems to be from system issues that they had, but a lot of it is just straight disruption, at the end of the day.
You’ve got online adoption going up and up, and the likes of Clicks rely on people going to the store, walking to the pharmacy, and not just leaving with their medicine – they need you to buy stuff in the front shop for their business to actually work.
You’ve also got all the Chinese platforms, obviously, that people are increasingly buying from. I keep seeing people talking about online betting and gambling and the money going out the door on that stuff instead of on consumer discretionary items that it might have been used for previously.
Look, I like to think we’re not in a world where people are gambling instead of buying a kettle, but the data seems to suggest that maybe we are, so, obviously, that’s not helping Clicks.
That’s a very important source of margin. People say, "Oh, it’s such a defensive business." But that share price is down 6.5% year-to-date.
Defensive is not a guarantee that 1) sales will go up by a meaningful number, 2) you won’t be disrupted, or 3) you’ll have steady margins. It doesn’t guarantee any of those things.
The only thing that a defensive stock does is tell you, “Well, our demand is a little bit more resilient to what happens out there in the market.”
And of course, with Clicks, is it really defensive? Because where they make their margins is actually lots of discretionary categories.
And previously, where people were very scared of the South African market, you’d have a lot of capital cooped up here, and you had some international buyers, as well, who would allocate to Clicks.
I’ve always seen lots of analysis around the Clicks shareholder register and how international it’s always been. But now, actually, there are other ways to go and get exposure to South Africa. There are lots of growth opportunities, and so people seem to be rotating out of Clicks, actually, and into a couple of other things.
One other data point I’ll give you, Moe is Cashbuild – not good (this is very much hot off the press). So, Q1 sales – up 5%, that’s existing or same-store sales. Q2 sales (that’s the latest release) – down 1%.
Which, for me, was actually mildly shocking because you have to remember: we don’t have load shedding; interest rates have come down; sentiment here has supposedly gone up. Cashbuild should be benefiting from literally all of that, but instead, its sales were down 1% in the second quarter.
Now, is it a Cashbuild-specific issue, or is it a macro issue? Ideally, we need another data point to wait and see – something like Build it at Spar will help us.
But that really is a horrible number, and inflation was only 0.8%, so again, volumes are negative; they aren’t coming through.
If there’s an economic recovery happening right now in South Africa, we aren’t really seeing it in these numbers. As much as emerging markets might be bullish right now, Moe, I just think it looks like South African consumer stocks are in for another tough period, at least for now, after what was not a great 2025 at all.
So, you can be bullish on South Africa's market, you can be bullish on emerging markets, but on South African consumers, I would be careful. Truly.
Mohammed Nalla: That’s why I just love having these conversations, Ghost. Because it gives me additional data points, it helps flesh out the entire kind of investment thesis, and it has actually validated a couple of core things that I’ve been looking at, behind the scenes.
One is that we generally look at equities on the show because that’s where a lot of the market is focused, but emerging markets are not just equities, right? Emerging markets also have bond markets, and South Africa has historically always been a yield-seeking destination rather than a growth-seeking destination.
That stands to reason because, if your economic growth, at a headline level (GDP), is 1% to 1.5%, that’s not exciting. There are emerging markets growing at 3% to 4% out there, so that kind of plays into South Africa being a yield-seeking destination.
South African bonds from a carry-trade perspective have been attractive for several years, and, I think, continue to remain attractive even though they’ve compressed quite a bit – yes, that’s come in quite a bit there; real yield is still pretty decent.
And so South Africa, for me, is very much a yield-seeking destination rather than a growth-seeking destination. Even if I were bullish on emerging markets, I would be saying, “Maybe emerging markets ex-South Africa.”
Now, that leads into a last point I want to make here: we haven’t even touched on the geopolitical risks. We haven’t spoken about policy coming out of the US. What does that mean for the emerging markets out there?
But if you go to real investment in economies, my argument effectively is that if the US is going down this path of fairly antagonistic foreign policy, emerging markets are probably going to want to de-risk themselves against some of that.
And that would mean, for example, are you reliant on US data centres? Should you be building your own data centres? Are you reliant on the US for your export markets?
And that gives you very different dynamics based on which emerging market you look at. If we come all the way back to the consumer, you’ve mentioned a very tough backdrop for consumers in South Africa, but we can actually juxtapose that against LatAm markets.
I was very early on LatAm markets (too early, in fact; I was about three quarters early on LatAm), saying, "Hey, you know what? This should do a lot better on all of those metrics I mentioned: valuation, demographic, consumer spending cycle.”
And I was wrong. I was wrong for almost a year. But if you look at the performance much more recently, that has shot the lights out. Those LatAm markets have done really well, and that’s because they’ve got a little bit more of that consumer resilience baked in.
On Magic Markets Premium, we’ve covered a stock like MercadoLibre. That’s an e-commerce platform with a very strong payments engine on the back of that, and that’s a nice play-through in terms of what’s happening with consumers – not just in Mexico, but within that broader LatAm market.
So, Ghost, there is so much to unpack on shows like this. I hope we’ve touched on a couple of key points that our listeners can then take away and go and digest for themselves. Look at that calibrated against their own risk appetite and views on the market – what the data points are that they’re seeing, and use that to frame their overall investment thesis.
I’ve certainly learned something from the show. Ghost, I’m happy to leave it there. I don’t know if you have anything additional to add to this?
My parting comment on this, quite simply, is that I think emerging markets are reasonably well priced, from a valuation perspective. I think there’s some scope for that.
I think certain emerging markets out there have growth levers that they can pull, and I would be looking at diversifying my exposure (whether I’m a South African or a global investor) into some of those select global emerging markets.
The Finance Ghost: No, nothing to add there, Moe. I think we can call it there for this week. And obviously, we’ll be back next week looking at some macro stuff, looking at some stock-specific stuff, as we always do.
To our listeners, if there’s something specific you want us to look at (and obviously just your thoughts on anything you hear on Magic Markets), then reach out to us on either of our social media handles or via Magic Markets as well.
And Moe, thanks for, as always, making time for this. We’ll do this again next week.
Mohammed Nalla: Indeed, Ghost. And for those of you that don’t know, as Ghost has mentioned, our social media handles are @MagicMarketsPod, @FinanceGhost and @MohammedNalla, all on X, or you can find us on LinkedIn. Pop us a note on there.
We hope you’ve enjoyed this. Until next week – same time, same place. Thanks, and cheers.
The Finance Ghost: Ciao.
